SPACs: Only Mostly Dead?

Since the U.S. Securities and Exchange Commission (the “SEC”) adopted final rules that bring Special Acquisition Company (“SPAC”) offerings and merger transactions closer in line with traditional Initial Public Offerings (“IPOs”), the narrative has overwhelmingly described a bleak, somewhat apocalyptic, outlook for SPACs. Understandably so, as the final rules require enhanced disclosure regarding sponsor compensation, dilution risk to shareholders, conflicts of interest between shareholders and sponsors, and target company information, which are coupled with increased liability exposure for parties in a de-SPAC transaction. It is not difficult to find justification for SEC Commissioner Hester M. Pierce’s grim dissenting statement that “the regulatory reaper came for SPACs and seems to have won.” As the proclaimed SPAC apocalypse approaches, did the SEC really kill the SPAC?

Recent data may suggest otherwise. As of March 20, 2024, five of the 14 IPOs this year are SPACs. This represents approximately 36% of the total IPOs this year. If this SPAC rate continues, then this year will be well above the average SPAC rate of approximately 21% between 2003 and 2023. If we take a step further and exclude 2020 – 2023, the years when everyone and their dentist was sponsoring a SPAC, this year has the highest SPAC rate since 2008.  

Conceding that the final rules go into effect on July 1, 2024, this sample size is relatively small, and the SPACs that completed their IPOs have been in the pipeline for some time, it does at the very least, push back on the narrative that SPACs will become obsolete when subjected to the SEC’s final rules.

Instead of killing SPACs, the final rules may bring forth a more sophisticated SPAC market. For example, a majority of the recent SPAC IPOs involved parties on a second or third SPAC iteration. Additionally, deal terms may be reflecting the benefits of SPACs with the SEC’s goal to address dilution-risk as demonstrated by the first SPAC IPO since 2021 to offer only ordinary shares, without warrants or rights. These recent examples may signal that sophisticated parties aren’t killing SPACs but are adapting them to fit a new regulatory reality.

We believe, as we did before the recent boom in SPAC offerings, that there is a place for SPACs as an alternative to the traditional IPO pathway to becoming a public company. Notwithstanding the more burdensome regulatory regime, SPACs still provide an accelerated path to becoming public, improved pricing certainty for target company founders and early investors, and, with a good sponsor group, access to a critical network of professional advisors, bankers and board candidates that many pre-IPO and first-time public company management teams lack.  Critically, SPACs provide a pathway to becoming public during those times when the traditional “IPO window” is closed.

The SEC has changed the status quo SPAC dynamics and it is unlikely that SPAC activity will return to the days of the recent past, and that is probably for the best. However, we believe it’s too soon to proclaim that SPACs no longer have a role to play in a healthy and robust capital market.

We will continue to follow the SPAC market and provide updates as more information and data becomes available. For more insights and perspective on the final rules, check out our discussion in our Legal Current. Additionally, you can find the adopted rules summarized in the SEC’s Fact Sheet.

If you have any questions about the final rules, please contact a member of Harter Secrest & Emery’s Securities and Capital Markets group.

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